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Does Political Corruption Impede Firm Innovation? Evidence from the United States

Published online by Cambridge University Press:  24 April 2020

Qianqian Huang Open the ORCID record for Qianqian Huang [Opens in a new window]  and
Tao Yuan
Qianqian Huang
Affiliation:
Huang, qiahuang@cityu.edu.hk, City University of Hong Kong College of Business
Tao Yuan*
Affiliation:
Yuan, finyuan@nju.edu.cn, Nanjing University School of Business
*
Yuan (corresponding author), finyuan@nju.edu.cn
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Abstract

We examine how local political corruption affects firm innovation in the United States. We find that firms located in highly corrupt areas are less innovative as measured by their patenting activities. The results are robust to the inclusion of a broad set of regional characteristics, instrumental variable analysis, matching analysis, difference-in-differences test, and alternative proxies for local corruption. Further analysis shows that reduced innovation incentives due to high extortion risk and decreased threat of competition could be the possible economic channels through which corruption affects innovation. Overall, our results indicate that local political corruption impedes corporate innovation in the United States.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 1 , February 2021 , pp. 213 - 248
Copyright
© Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We thank Jarrad Harford (the editor) and Krishnamurthy Subramanian (the referee) for their constructive comments. We also thank Thomas Chemmanur, Po-Hsuan Hsu, Gustav Martinsson, Yaxuan Qi, Xuan Tian, conference participants at the 2018 AFA Ph.D. poster session, the 2017 Entrepreneurial Finance Conference, and the 2017 Australasian Finance and Banking Conference, and seminar participants at City University of Hong Kong for helpful suggestions and comments. We gratefully acknowledge financial support from the City University of Hong Kong (Grant No. 7004989). All errors are ours.

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